IDEAS home Printed from https://ideas.repec.org/p/upf/upfgen/623.html
   My bibliography  Save this paper

Relying on the agent in charge of production for project evaluation

Author

Listed:
  • Doh Shin Jeon

Abstract

I study the optimal project choice when the principal relies on the agent in charge of production for project evaluation. The principal has to choose between a safe project generating a fixed revenue and a risky project generating an uncertain revenue. The agent has private information about the production cost under each project but also about the signal regarding the profitability of the risky project. If the signal favoring the adoption of the risky project is goods news to the agent, integrating production and project evaluation tasks does not generate any loss compared to the benchmark in which the principal herself receives the signal. By contrast, if it is bad news, task integration creates an endogenous reservation utility which is type-dependent and thereby generates countervailing incentives, which can make a bias toward either project optimal. Our results can offer an explanation for why good firms can go bad and a rationale for the separation of day-to-day operating decisions from long-term strategic decisions stressed by Williamson.

Suggested Citation

  • Doh Shin Jeon, "undated". "Relying on the agent in charge of production for project evaluation," Economics Working Papers 623, Department of Economics and Business, Universitat Pompeu Fabra, revised Jan 2006.
    • Handle: RePEc:upf:upfgen:623
    as

    Download full text from publisher

    File URL: https://econ-papers.upf.edu/papers/623.pdf
    File Function: Whole Paper
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Cremer, Jacques & Khalil, Fahad, 1992. "Gathering Information before Signing a Contract," American Economic Review, American Economic Association, vol. 82(3), pages 566-578, June.
    2. Yeon-Koo Che, 1993. "Design Competition through Multidimensional Auctions," RAND Journal of Economics, The RAND Corporation, vol. 24(4), pages 668-680, Winter.
    3. Cremer, Jacques & Khalil, Fahad & Rochet, Jean-Charles, 1998. "Contracts and Productive Information Gathering," Games and Economic Behavior, Elsevier, vol. 25(2), pages 174-193, November.
    4. Rogerson, William P, 1990. "Quality vs. Quantity in Military Procurement," American Economic Review, American Economic Association, vol. 80(1), pages 83-92, March.
    5. repec:ner:ucllon:http://discovery.ucl.ac.uk/17678/ is not listed on IDEAS
    6. Jullien, Bruno, 2000. "Participation Constraints in Adverse Selection Models," Journal of Economic Theory, Elsevier, vol. 93(1), pages 1-47, July.
    7. Cremer, Jacques & Khalil, Fahad & Rochet, Jean-Charles, 1998. "Strategic Information Gathering before a Contract Is Offered," Journal of Economic Theory, Elsevier, vol. 81(1), pages 163-200, July.
    8. Lewis, Tracy R & Sappington, David E M, 1997. "Information Management in Incentive Problems," Journal of Political Economy, University of Chicago Press, vol. 105(4), pages 796-821, August.
    9. Farrell, Joseph & Saloner, Garth, 1986. "Installed Base and Compatibility: Innovation, Product Preannouncements, and Predation," American Economic Review, American Economic Association, vol. 76(5), pages 940-955, December.
    10. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, December.
    11. Aghion, Philippe & Tirole, Jean, 1997. "Formal and Real Authority in Organizations," Journal of Political Economy, University of Chicago Press, vol. 105(1), pages 1-29, February.
    12. Joseph Farrell & Garth Saloner, 1985. "Installed Base and Compatibility With Implications for Product Preannouncements," Working papers 385, Massachusetts Institute of Technology (MIT), Department of Economics.
    13. Severin Borenstein & Joseph Farrell, 2007. "Do investors forecast fat firms? Evidence from the gold-mining industry," RAND Journal of Economics, RAND Corporation, vol. 38(3), pages 626-647, September.
    14. Sappington, David, 1983. "Limited liability contracts between principal and agent," Journal of Economic Theory, Elsevier, vol. 29(1), pages 1-21, February.
    15. Armstrong, Mark & Rochet, Jean-Charles, 1999. "Multi-dimensional screening:: A user's guide," European Economic Review, Elsevier, vol. 43(4-6), pages 959-979, April.
    16. Baron, David P & Besanko, David, 1992. "Information, Control, and Organizational Structure," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 1(2), pages 237-275, Summer.
    17. Gromb, Denis & Martimort, David, 2004. "The Organization of Delegated Expertise," IDEI Working Papers 284, Institut d'Économie Industrielle (IDEI), Toulouse.
    18. Lewis, Tracy R. & Feenstra, Robert & Ware, Roger, 1989. "Eliminating price supports : A political economy perspective," Journal of Public Economics, Elsevier, vol. 40(2), pages 159-185, November.
    19. Jean-Jacques Laffont & David Martimort, 1999. "Separation of Regulators Against Collusive Behavior," RAND Journal of Economics, The RAND Corporation, vol. 30(2), pages 232-262, Summer.
    20. Holmstrom, Bengt & Milgrom, Paul, 1991. "Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 7(0), pages 24-52, Special I.
    21. Richard J. Gilbert & Michael H. Riordan, 1995. "Regulating Complementary Products: A Comparative Institutional Analysis," RAND Journal of Economics, The RAND Corporation, vol. 26(2), pages 243-256, Summer.
    22. David P. Baron & David Besanko, 1992. "Information, Control, and Organizational Structure," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 1(2), pages 237-275, June.
    23. Cremer, J. & Khalil, F. & Rochet, J.-C., 1997. "Strategic information gathering before a contract is offered," Discussion Paper Series In Economics And Econometrics 9708, Economics Division, School of Social Sciences, University of Southampton.
    24. Steven D. Levitt & Christopher M. Snyder, 1997. "Is No. News Bad News? Information Transmission and the Role of "Early Warning" in the Principal-Agent Model," RAND Journal of Economics, The RAND Corporation, vol. 28(4), pages 641-661, Winter.
    25. Tracy R. Lewis & David E.M. Sappington, 1991. "Incentives for Monitoring Quality," RAND Journal of Economics, The RAND Corporation, vol. 22(3), pages 370-384, Autumn.
    26. Gilbert, Richard J & Newbery, David M G, 1982. "Preemptive Patenting and the Persistence of Monopoly," American Economic Review, American Economic Association, vol. 72(3), pages 514-526, June.
    27. Jean-Jacques Laffont & Jean Tirole, 1993. "A Theory of Incentives in Procurement and Regulation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121743, December.
    28. Jean-Charles Rochet & Philippe Chone, 1998. "Ironing, Sweeping, and Multidimensional Screening," Econometrica, Econometric Society, vol. 66(4), pages 783-826, July.
    29. Robin E. Wells, 1998. "Information, Authority and Internal Governance of the Firm," Working papers 98-3, Massachusetts Institute of Technology (MIT), Department of Economics.
    30. Laffont, J-J. & Tirole, J., 1989. "Provision Of Quality And Power Of Incentive Schemes In Regulated Industries," Working papers 528, Massachusetts Institute of Technology (MIT), Department of Economics.
    31. Lewis, Tracy R. & Sappington, David E. M., 1989. "Countervailing incentives in agency problems," Journal of Economic Theory, Elsevier, vol. 49(2), pages 294-313, December.
    32. Maggi G. & Rodriguez-Clare A., 1995. "On Countervailing Incentives," Journal of Economic Theory, Elsevier, vol. 66(1), pages 238-263, June.
    33. Tirole, Jean, 1986. "Hierarchies and Bureaucracies: On the Role of Collusion in Organizations," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 2(2), pages 181-214, Fall.
    34. Potters, Jan & van Winden, Frans, 1992. "Lobbying and Asymmetric Information," Public Choice, Springer, vol. 74(3), pages 269-292, October.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Armstrong, Mark & Sappington, David E.M., 2007. "Recent Developments in the Theory of Regulation," Handbook of Industrial Organization, in: Mark Armstrong & Robert Porter (ed.), Handbook of Industrial Organization, edition 1, volume 3, chapter 27, pages 1557-1700, Elsevier.
    2. Patrick W. Schmitz, 2005. "Allocating Control in Agency Problems with Limited Liability and Sequential Hidden Actions," RAND Journal of Economics, The RAND Corporation, vol. 36(2), pages 318-336, Summer.
    3. Malcomson James M, 2009. "Principal and Expert Agent," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 9(1), pages 1-36, May.
    4. Iossa, Elisabetta & Martimort, David, 2015. "Pessimistic information gathering," Games and Economic Behavior, Elsevier, vol. 91(C), pages 75-96.
    5. Szalay, Dezsö, 2009. "Contracts with endogenous information," Games and Economic Behavior, Elsevier, vol. 65(2), pages 586-625, March.
    6. Shin, Dongsoo & Yun, Sungho, 2023. "Information acquisition and countervailing incentives," Journal of Mathematical Economics, Elsevier, vol. 107(C).
    7. Martimort, David & Pouyet, Jerome, 2008. "To build or not to build: Normative and positive theories of public-private partnerships," International Journal of Industrial Organization, Elsevier, vol. 26(2), pages 393-411, March.
    8. Eva I. Hoppe & Patrick W. Schmitz, 2013. "Contracting under Incomplete Information and Social Preferences: An Experimental Study," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 80(4), pages 1516-1544.
    9. Choe Chongwoo & Park In-Uck, 2011. "Information, Authority, and Corporate Hierarchies," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 11(1), pages 1-39, February.
    10. Fahad Khalil & Doyoung Kim & Dongsoo Shin, 2006. "Optimal Task Design: To Integrate or Separate Planning and Implementation?," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 15(2), pages 457-478, June.
    11. Schmitz, Patrick W., 2021. "Contracting under adverse selection: Certifiable vs. uncertifiable information," Journal of Economic Behavior & Organization, Elsevier, vol. 182(C), pages 100-112.
    12. Jensen, S., 2000. "Price Discrimination and Three Part Tariffs in a Duopoly," Papers 3/2000, Norwegian School of Economics and Business Administration-.
    13. Shin, Dongsoo, 2008. "Information acquisition and optimal project management," International Journal of Industrial Organization, Elsevier, vol. 26(4), pages 1032-1043, July.
    14. Gick, Wolfgang, 2015. "A Theory of Delegated Contracting," VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 113069, Verein für Socialpolitik / German Economic Association.
    15. Martimort, David & Pouyet, Jérôme, 2006. "'Build It or Not': Normative and Positive Theories of Public-Private Partnerships," CEPR Discussion Papers 5610, C.E.P.R. Discussion Papers.
    16. Elisabetta Iossa & David Martimort, 2012. "Risk allocation and the costs and benefits of public--private partnerships," RAND Journal of Economics, RAND Corporation, vol. 43(3), pages 442-474, September.
    17. Lindbeck, Assar & Weibull, Jörgen, 2020. "Delegation of investment decisions, and optimal remuneration of agents," European Economic Review, Elsevier, vol. 129(C).
    18. Dongsoo Shin & Sungho Yun, 2008. "Informed principal and information gathering agent," Review of Economic Design, Springer;Society for Economic Design, vol. 12(4), pages 229-244, December.
    19. Antoine Faure-Grimaud & Jean-Jacques Laffont & David Martimort, 2000. "A Theory of Supervision with Endogenous Transaction Costs," Annals of Economics and Finance, Society for AEF, vol. 1(2), pages 231-263, November.
    20. Liu, Ting & Albert Ma, Ching-to & Mak, Henry Y., 2018. "Incentives for motivated experts in a partnership," Journal of Economic Behavior & Organization, Elsevier, vol. 152(C), pages 296-313.

    More about this item

    Keywords

    Information flows; countervailing incentives; multitasking; asymmetric information; innovations;
    All these keywords.

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:upf:upfgen:623. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: http://www.econ.upf.edu/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.